PNB effect: RBI ends LoUs, LoCs with immediate effect

The RBI said the decision to discontinue the practice of LoUs and Letters of Comfort for trade finance comes into force with immediate effect. Reutrs File

RBI bans use of letters of undertaking

State-owned PNB has reported fraudulent issuance of Letters of Undertaking (LoUs)/ Foreign Letters of Credit (FLCs) for payments of import bills, amounting to Rs 12,967.86 crore, to the RBI, Minister of State for Finance Shiv Pratap Shukla said in a written reply to the Rajya Sabha.

Experts said the RBI's move to bar LoUs could affect genuine importers.

The latest circular comes in the backdrop of the multi-billion dollar scam unearthed at one of the branches of PNB where banks official fraudulently issued LoUs on behalf of some companies belonging to Mr Modi group for availing buyers credit from overseas branches of Indian banks through Society for Worldwide Interbank Financial Telecommunication.

Letters of Credit and bank guarantees for trade credits for imports into India will continue to be issued subject to compliance with the RBI provisions, added the statement.

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In the aftermath of Punjab National Bank (PNB) fraud case, a couple of banks had clamped down on the issue of LoUs.

An unidentified lawyer for Choksi told Reuters that he was unaware of the new allegations, and refused to comment. This is with response to a Hindustan Times Report mentioning that Nirav Modi in an email had offered jewelry worth Rs. 2,000 crore, current account deposits of Rs 200 crore and immovable properties of Rs 50 crore to settle part of his liabilities.

Two officials at PNB's Brady House branch in Mumbai issued LoUs without authorisation to firms linked to diamantaires Nirav Modi and his uncle Mehul Choksi.

The RBI decision could potentially push up the cost of imports by up to half a percentage point, besides putting foreign banks on an even keel with Indian banks in financing imports, bankers said. None of the fraudulent transactions were registered on the bank's internal transaction messaging system, the Core Banking Solution (CBS), enabling the fraud to go undetected for long.

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